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International Tax

Competitiveness

Indexby Kyle Pomerleau

Andrew Lundeen

Tallinn,

PRINCIPLEDINSIGHTFULENGAGED


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2Executive Summary

The Tax Foundaons Internaonal Tax Compeveness Index (ITCI) measures the

degree to which the 34 OECD countries tax systems promote compeveness

through low tax burdens on business investment and neutrality through a well-structured tax code. The ITCI considers more than forty variables across ve

categories: Corporate Taxes, Consumpon Taxes, Property Taxes, Individual Taxes

and Internaonal Tax Rules.

The ITCI aempts to display not only which countries provide the best tax

environment for investment, but also the best tax environment in which to start

and grow a business.

The ITCI nds that Estonia has the most compeve tax system in the OECD. Estonia has

a relavely low corporate tax rate at 21 percent, no double taxaon on dividend income, a

nearly at 21 percent income tax rate, and a property tax that taxes only land (not buildings

and structures).

France has the least compeve tax system in the OECD. It has one of the highest

corporate tax rates in the OECD at 34.4 percent, high property taxes that include an

annual wealth tax, and high, progressive individual taxes that also apply to capital gains and

dividend income.

The ITCI nds that the United States has the 32nd most compeve tax system out of the

34 OECD member countries.

The largest factors behind the United States score are that the U.S. has the highest

corporate tax rate in the developed world and that it is one of the six remaining countries

in the OECD with a worldwide system of taxaon.

The United States also scores poorly on property taxes due to its estate tax and poorly

structured state and local property taxes

Other pialls for the United States are its individual taxes with a high top marginal tax rate

and the double taxaon of capital gains and dividend income.

Key Findings


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3axes are a crucial component of a countrys international competitiveness. In todaysglobalized economy, the structure of a countrys tax code is an important factor for

businesses when they decide where to invest. No longer can a country tax business

investment and activity at a high rate without adversely affecting its economic

performance. In recent years, many countries have recognized this fact and have moved to

reform their tax codes to be more competitive. However, others have failed to do so andare falling behind the global movement.

Te United States provides a good example of an uncompetitive tax code. Te last major

change to the U.S. tax code occurred 28 years ago as part of the ax Reform Act of 1986,

when Congress reduced the top marginal corporate income tax rate from 46 percent to 34

percent in an attempt to make U.S. corporations more competitive overseas. Since then,

the OECD countries have followed suit, reducing the OECD average corporate tax rate

from 47.5 percent in the early 1980s to around 25 percent today. Te result: the United

States now has the highest corporate income tax rate in the industrialized world.

While the corporate income tax rate is a very important determinant of economic growth

and economic competitiveness, it is not the only thing that matters. Te competitiveness

of a tax code is determined by several factors. Te structure and rate of corporate taxes,

property taxes, income taxes, cost recovery of business investment, and whether a country

has a territorial system are some of the factors that determine whether a countrys tax code

is competitive.

Many countries have been working hard to improve their tax codes. New Zealand is a

good example of one of those countries. In a 2010 presentation, the chief economist

of the New Zealand reasury stated, Global trends in corporate and personal taxes aremaking New Zealands system less internationally competitive.1In response to these

global trends, New Zealand cut its top marginal income tax rate from 38 percent to 33

percent, shifted to a greater reliance on the goods and services tax, and cut their corporate

tax rate to 28 percent from 30 percent. Tis followed a shift to a territorial tax system

in 2009. New Zealand added these changes to a tax system that already had multiple

competitive features, including no inheritance tax, no general capital gains tax, and no

payroll taxes.2

In a world where businesses, people, and money can move with relative ease, having a

competitive tax code has become even more important to economic success. Te example

set by New Zealand and other reformist countries shows the many ways countries can

improve their uncompetitive tax codes.3

* The authors would like to thank Sco Eastman for his research assistance.

1 Norman Gemmell, Tax Reform in New Zealand: Current Developments (June 2010),hp://www.victor ia.ac.nz/sacl/about/cpf/

publicaons/pdfs/4GemmellPostHenrypaper.pdf.

2 New Zealand has no general capital gains tax, though it does apply a tax on gains from foreign debt and equity investments.

See New Zealand Now, Taxes, hp://www.newzealandnow.govt.nz/living-in-nz/money-tax/nz-tax-system.

3 Every OECD country except the United States, Norway, and Chile have cut their corporate tax rate since 2000. See

Organizaon for Economic Cooperaon and Development, Tax Reform Trends in OECD Countries (June 30, 2011),hp://www.

oecd.org/ctp/48193734.pdf.
http://www.victoria.ac.nz/sacl/about/cpf/publications/pdfs/4GemmellPostHenrypaper.pdfhttp://www.victoria.ac.nz/sacl/about/cpf/publications/pdfs/4GemmellPostHenrypaper.pdfhttp://www.victoria.ac.nz/sacl/about/cpf/publications/pdfs/4GemmellPostHenrypaper.pdfhttp://www.newzealandnow.govt.nz/living-in-nz/money-tax/nz-tax-systemhttp://www.oecd.org/ctp/48193734.pdfhttp://www.oecd.org/ctp/48193734.pdfhttp://www.oecd.org/ctp/48193734.pdfhttp://www.oecd.org/ctp/48193734.pdfhttp://www.newzealandnow.govt.nz/living-in-nz/money-tax/nz-tax-systemhttp://www.victoria.ac.nz/sacl/about/cpf/publications/pdfs/4GemmellPostHenrypaper.pdfhttp://www.victoria.ac.nz/sacl/about/cpf/publications/pdfs/4GemmellPostHenrypaper.pdf


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4 Our International ax Competitiveness Index (ICI) seeks to measure the businesscompetitiveness of national tax systems. In order to do this, the ICI looks at over 40 tax

policy variables, including corporate income taxes, individual taxes, consumption taxes,

property taxes, and the treatment of foreign earnings.

Te ICI scores the 34 member countries of the OECD on these five categories in orderto rank the most competitive countries in the industrialized world.

2014 RankingsEstonia currently has the most competitive tax code in the OECD. Its top score is driven

by four positive features of its tax code. First, it has a 21 percent tax rate on corporate

income that is only applied to distributed profits. Second, it has a flat 21 percent tax on

individual income that does not apply to personal dividend income. Tird, its property

tax applies only to the value of land rather than taxing the value of real property or

capital. Finally, it has a territorial tax system that exempts 100 percent of the foreignprofit earned by domestic corporations from domestic taxation with few restrictions.

While Estonias tax system is unique in the OECD, the other top countries tax systems

receive high scores due to excellence in one or more of the major tax categories. New

Zealand has a relatively flat, low income tax that also exempts capital gains (combined

top rate of 33 percent), a well-structured property tax, and a broad-based value-added

tax. Switzerland has a relatively low corporate tax rate (21.1 percent), low, broad-based

consumption taxes (an 8 percent value-added tax), and a relatively flat individual income

tax that exempts capital gains from taxation (combined rate of 36 percent). Sweden has a

lower than average corporate income tax rate of 22 percent and no estate or wealth taxes.Australia, like New Zealand, has well-structured property and income taxes. Additionally,

every single country in the top five has a territorial tax system.

France has the least competitive tax system in the OECD. It has one of the highest

corporate income tax rates in the OECD (34.4 percent), high property taxes that include

an annual net wealth tax, a financial transaction tax, and an estate tax. France also has

high, progressive individual income taxes that apply to both dividend and capital gains

income.

Te United States places 32nd out of the 34 OECD countries on the ICI. Tere are

three main drivers behind the U.S.s low score. First, it has the highest corporate income

tax rate in the OECD at 39.1 percent. Second, it is one of the only countries in the

OECD that does not have a territorial tax system, which would exempt foreign profits

earned by domestic corporations from domestic taxation. Finally, the United States loses

points for having a relatively high, progressive individual income tax (combined top rate

of 46.3 percent) that taxes both dividends and capital gains, albeit at a reduced rate.

In general, countries that rank poorly on the ICI have high corporate income taxes. Te

five countries at the bottom of the rankings have corporate tax rates of 30 percent


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5Table 1. 2014 Internaonal Tax Compeveness Index Rankings

CountryOverallScore

OverallRank

CorporateTax Rank

ConsumponTaxes Rank

PropertyTaxes Rank

IndividualTaxes Rank

InternaonalTax Rules Rank

Estonia 100.0 1 1 8 1 2 11

New Zealand 87.9 2 22 6 3 1 21

Switzerland 82.4 3 7 1 32 5 9

Sweden 79.7 4 3 12 6 21 7

Australia 78.4 5 24 7 4 8 22

Luxembourg 77.2 6 31 5 17 16 2

Netherlands 76.6 7 18 11 21 6 1

Slovak Republic 74.3 8 16 32 2 7 6

Turkey 70.4 9 10 26 8 4 19

Slovenia 69.8 10 4 25 16 11 13

Finland 67.3 11 9 15 9 23 18

Austria 67.2 12 17 22 18 22 4

Korea 66.7 13 13 3 24 10 30

Norway 66.7 14 20 23 14 13 12

Ireland 65.7 15 2 24 7 20 26

Czech Republic 64.4 16 6 28 10 12 24

Denmark 63.7 17 14 14 11 28 20

Hungary 63.5 18 11 33 20 17 3

Mexico 63.3 19 32 21 5 3 32

Germany 62.8 20 25 13 15 32 10

United Kingdom 62.2 21 21 19 29 18 5

Belgium 59.6 22 28 29 22 9 8

Iceland 57.1 23 12 16 28 29 16

Canada 56.1 24 19 10 23 24 27

Japan 54.8 25 34 2 26 25 25

Poland 53.8 26 8 34 27 15 23

Greece 53.3 27 15 27 25 14 28

Israel 53.2 28 26 9 12 27 31

Chile 51.1 29 5 30 13 19 33

Spain 50.8 30 27 18 30 31 14

Italy 47.2 31 23 20 33 33 15United States 44.6 32 33 4 31 26 34

Portugal 42.9 33 29 31 19 30 29

France 38.9 34 30 17 34 34 17


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6 or higher, except for Italy with a rate of 27.5 percent. All five countries have highconsumption taxes with rates of 20 percent or higher, except for the United States. Tey

also levy relatively high property taxes on real property, have financial transaction taxes

(except Spain), and have estate taxes. Finally, these bottom five countries have relatively

high, progressive income taxes that apply to capital gains and dividends.

The International Tax Competitiveness Index

Te International ax Competitiveness Index seeks to measure the extent to which a

countrys tax system adheres to two important principles of tax policy: competitiveness

and neutrality.4

A competitive tax code is a code that limits the taxation of businesses and investment. In

todays globalized world, capital is highly mobile. Businesses can choose to invest in any

number of countries throughout the world in order to find the highest rate of return. Ti

means that businesses will look for countries with lower tax rates on investments in orderto maximize their after-tax rate of return. If a countrys tax rate is too high, it will drive

investment elsewhere, leading to slower economic growth.

However, low rates are not the only component of a good tax code; a tax code must also

be neutral. A neutral tax code is simply a tax code that seeks to raise the most revenue

with the fewest economic distortions. Tis means that it doesnt favor consumption

over saving, as happens with capital gains and dividends taxes, estate taxes, and high

progressive income taxes. Tis also means no targeted tax breaks for businesses for specific

business activities.

Another important aspect of neutrality is the proper definition of business income.

For a business, profits are revenue minus costs. However, a countrys tax code may use

a different definition. Tis is especially true with regard to capital investments. Most

countries do not allow a business to account for the full cost of many investments they

make, artificially driving up a businesss taxable income. Tis reduces the after-tax rate of

return on investment, thus diminishing the incentive to invest. A neutral tax code would

define business income the way that businesses see it: revenue minus costs.

A tax code that is competitive and neutral promotes sustainable economic growth and

investment. In turn, this leads to more jobs, higher wages, more tax revenue, and a higher

overall quality of life.

It is true that taxes are not all that matter. Tere are many factors unrelated to taxes which

affect a countrys economic performance and business competitiveness. Nevertheless, taxe

affect the health of a countrys economy.

4 For a discussion of the methodology and a list of data sources, please see the Appendix.


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7In order to measure whether a countrys tax system is neutral and competitive, the ICIlooks at over 40 tax policy variables. Tese variables measure not only the specific burden

of a tax, but also how a tax is structured. For instance, a 25 percent corporate tax that

taxes true business income is much better than a 25 percent corporate tax that overstates a

businesss income through lengthy depreciation schedules.

Te ICI attempts to display not only which countries provide the best tax environment

for investment, but also the best tax environment in which to start and grow a business.


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8 Corporate Income TaxTe corporate income tax is a direct tax on the profits of a corporation. All OECD

countries levy a tax on corporate profits, but the rates and bases vary widely from country

to country. Corporate income taxes reduce the after-tax rate of return on corporate

investment. Tis increases the cost of capital, which leads to lower levels of investment.In turn, economic growth declines, while investment is driven to countries with lower

corporate tax burdens. Additionally, the corporate tax can lead to lower wages for

workers, lower returns for investors, and higher prices for consumers.

Although the corporate income tax has a large effect on a countrys economy, it raises a

relatively low amount of tax revenue for governments. Te ICI breaks the corporate

income tax category into three subcategories.

able 2 displays the Corporate ax category rank and score along with the ranks and

scores of the subcategories.

Top Marginal Corporate Income Tax Rate

Te top marginal corporate tax rate measures the rate at which the next dollar of profit

is taxed. High marginal corporate tax rates tend to discourage capital formation and slow

economic growth.5Countries with higher top marginal corporate income tax rates than

the OECD average receive lower scores than those with lower, more competitive rates.

Te United States has the highest top marginal corporate income tax rate at 39.1 percent

Tis is followed by Japan (37 percent), France (34.4 percent), and Portugal (31.5percent). Te lowest top marginal corporate income tax rate in the OECD is found in

Ireland (12.5 percent). Tere are four other countries with rates below 20 percent: the

Czech Republic (19 percent), Hungary (19 percent), Poland (19 percent), and Slovenia

(17 percent). Te OECD average is 25.4 percent.6

Cost Recovery

o a business, income is revenue (what a business makes in sales) minus costs (the cost of

doing business). Te corporate income tax is meant to be a tax on this income. Tus, it is

important that a tax code properly define what constitutes taxable income. If a tax code

does not allow businesses to account for all of the costs of doing business, it will inflate

a businesss taxable income and thus its tax bill. Tis increases the cost of capital, which

reduces the demand for capital, leading to slower investment and economic growth.

5 Organizaon for Economic Cooperaon and Development, Tax Policy Reform and Economic Growth, OECD TAXPOLICYSTUDIES

No. 20 (2010), hp://www.oecd.org/ctp/tax-policy/46605695.pdf.

6 Organizaon for Economic Cooperaon and Development, OECD Tax Database, Table II.1 - Corporate income tax rates: basic/

non-targeted (2000-2014) (updated May 2014),hp://www.oecd.org/tax/tax-policy/tax-database.htm.
http://www.oecd.org/ctp/tax-policy/46605695.pdfhttp://www.oecd.org/tax/tax-policy/tax-database.htmhttp://www.oecd.org/tax/tax-policy/tax-database.htmhttp://www.oecd.org/tax/tax-policy/tax-database.htmhttp://www.oecd.org/ctp/tax-policy/46605695.pdf


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9Table 2. Corporate Tax

CountryOverallRank

OverallScore

RateRank

RateScore

CostRecovery

Rank

CostRecovery

Score

Incenves/Complexity

Rank

Incenves/Complexity

Score

Australia 24 47.0 26 21.9 19 47.4 9 73.8

Austria 17 59.0 17 52.7 13 52.6 12 66.5

Belgium 28 41.3 31 7.4 2 75.6 28 50.9

Canada 19 54.0 20 43.9 26 39.5 8 76.4

Chile 5 72.5 6 82.4 33 29.4 3 96.4

Czech Republic 6 70.6 3 86.6 18 48.5 15 61.5

Denmark 14 60.4 16 56.0 23 43.1 6 78.0

Estonia 1 100.0 10 77.4 1 100.0 2 98.7

Finland 9 68.4 6 82.4 32 31.9 5 82.2

France 30 37.8 32 6.5 5 63.2 19 59.0

Germany 25 45.6 29 21.0 10 55.3 16 60.9

Greece 15 60.1 19 45.9 4 64.6 14 63.3

Hungary 11 67.0 3 86.6 25 41.4 21 57.7

Iceland 12 62.6 6 82.4 31 35.5 20 58.6

Ireland 2 83.4 1 100.0 17 48.7 22 55.9

Israel 26 41.8 21 42.6 6 60.8 33 18.9

Italy 23 48.2 23 36.1 9 56.0 29 47.2

Japan 34 16.7 33 2.6 29 36.6 32 25.6

Korea 13 61.2 15 58.0 8 58.8 18 59.8

Luxembourg 31 37.8 25 25.9 3 69.6 34 17.0

Mexico 32 37.4 26 21.9 24 42.6 30 46.8

Netherlands 18 55.0 17 52.7 11 53.9 25 52.0

New Zealand 22 49.0 24 33.0 28 37.0 7 76.8

Norway 20 53.9 22 39.3 30 35.5 4 85.8

Poland 8 69.0 3 86.6 27 38.4 10 68.4

Portugal 29 41.0 30 15.2 21 46.0 11 67.1

Slovak Republic 16 59.8 13 71.9 12 53.5 31 44.0

Slovenia 4 74.1 2 93.1 14 52.3 23 52.9

Spain 27 41.5 26 21.9 16 49.9 24 52.4

Sweden 3 77.0 13 71.9 15 51.0 1 100.0

Switzerland 7 69.2 12 76.6 7 59.7 17 60.6

Turkey 10 68.3 6 82.4 20 46.8 13 63.5

United Kingdom 21 53.4 10 77.4 34 25.1 27 51.3

United States 33 21.0 34 1.1 22 44.4 26 51.5


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10 Capital Cost Recovery: Machines, Buildings, and Intangiblesypically, when a business calculates its taxable income, it takes its revenue and subtracts

its costs (such as wages and raw materials). However, with capital investments (buildings,

machines, and other equipment) the calculation is more complicated. Businesses in

most countries are generally not allowed to immediately deduct the cost of their capitalinvestments. Instead, they are required to write off these costs over several years or even

decades, depending on the type of asset.

Depreciation schedules establish the amounts businesses are legally allowed to write off,

as well as how long assets need to be written off. For instance, a government may require

a business to deduct an equal percent of the cost of a machine over a seven-year period.

By the end of the depreciation period, the business would have deducted the total initial

dollar cost of the asset. However, due to the time value of money (a normal real return

plus inflation), write-offs in later years are not as valuable in real terms as write-offs in

earlier years. As a result, businesses effectively lose the ability to deduct the full presentvalue of their investment cost. Tis treatment of capital expenses understates true busines

costs and overstates taxable income in present value terms.7

A countrys cost recovery score is determined by the capital allowances for three asset

types: machinery, industrial buildings, and intangibles.8Capital allowances are expressed

as a percent of the present value cost that corporations can write off over the life of an

asset. A 100 percent capital allowance represents a businesss ability to deduct the full

cost of an investment over its life. Countries that provide faster write-offs for capital

investments receive higher scores in the ICI.

On average, business can write off 81 percent of the cost of machinery, 43.5 percent of

the cost of industrial buildings, and 73 percent of the cost of intangibles.9Estonia, which

has a corporate tax only on distributed profits, is coded as allowing 100 percent of the

present value of a capital investment to be written off. Tis is done due to the fact that

distributed profits are determined by actual accounting profits. Te United States allows

an average write-off of only 62 percent across all capital investments, ranking 29th in the

OECD.

Inventories

In the same vein as capital investments, the costs of inventories are not written off in the

year in which the purchases are made. Instead, the costs of inventories are deducted when

the inventory is sold. As a result, it is necessary for governments to define the total cost o

inventories sold. Tere are three methods governments allow businesses to use to calculat

their inventories: Last In, First Out (LIFO); Average Cost; and First In, First Out (FIFO

7 Kyle Pomerleau, Cost Recovery across the OECD, TAXFOUNDATIONFISCALFACTNO. 402 (NOV. 19, 2013), hp://taxfoundaon.

org/arcle/capital-cost-recovery-across-oecd.

8 Intangible assets are typically amorzed, but the write-o is similar to depreciaon.

9 Oxford University Centre for Business Taxaon, CBT tax database, hp://www.sbs.ox.ac.uk/ideas-impact/tax/publicaons/

data. Capital allowances are calculated assuming a xed interest rate of 5 percent and xed inaon rate of 2.5 percent.
http://taxfoundation.org/article/capital-cost-recovery-across-oecdhttp://taxfoundation.org/article/capital-cost-recovery-across-oecdhttp://www.sbs.ox.ac.uk/ideas-impact/tax/publications/datahttp://www.sbs.ox.ac.uk/ideas-impact/tax/publications/datahttp://www.sbs.ox.ac.uk/ideas-impact/tax/publications/datahttp://www.sbs.ox.ac.uk/ideas-impact/tax/publications/datahttp://taxfoundation.org/article/capital-cost-recovery-across-oecdhttp://taxfoundation.org/article/capital-cost-recovery-across-oecd


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11Countries that allow businesses to choose the LIFO method receive the highest score,those that allow the Average Cost method receive an average score, and countries that

only allow the FIFO method receive the lowest score. Te United States, along with 14

other countries, allows companies to use the LIFO method of accounting.10Tirteen

countries use the Average Cost method of accounting, and six countries limit companies

to using the FIFO method of accounting.

Loss Offset Rules: Carryforwards and Carrybacks

In most countries, corporations are allowed to either deduct current year losses against

future profits, or deduct current year losses against past profits, receiving a tax rebate for

overpayments. Loss offset rules dictate the number of years a corporation is allowed to

carry forward or carry back net operating losses.

Te ability for a corporation to carry forward or carry back operating losses ensures that

a corporation is taxed on its average profitability over many years. Tis more efficientlyaccounts for a businesss true costs and profits rather than taxing a given years profits,

which are susceptible to the ups and downs of the economy. Restricting the carry forward

or carry back of losses places a greater average tax burden on industries that are more

susceptible to business cycles.

In 11 of the 34 OECD countries, corporations can carry forward losses indefinitely.11

Of the countries with restrictions, the average loss carryforward period is 17.3 years. Te

United States allows a carryforward period of 20 years. Te Slovak Republic has the most

restrictive loss carryforward period at 4 years. Te ICI ranks countries that allow losses

to be carried forward indefinitely higher than countries that restrict the number of yearscorporations are allowed to carry forward losses.

Countries are much more restrictive with loss carryback provisions than they are with

carryforward provisions. Only two countries allow unlimited carrybacks of losses (Estonia

and Chile). Of the ten countries that allow limited carrybacks, the average period is 1.35

years.12Te ICI penalizes the 22 countries that do not allow any loss carrybacks at all.

Tax Incentives and Complexity

Good tax policy treats economic decisions neutrally, neither encouraging nor discouraging

one activity over another. A tax incentive provides a tax credit, deduction, or preferential

tax rate for one type of economic activity but not others. Providing tax incentives or

special provisions distorts economic decisions.

For instance, when an industry receives a tax credit for producing a specific product,

it may choose to overinvest in that activity, which may otherwise not be profitable.

10 Id.

11 Deloie, Internaonal Tax Guides and Country Highlights, hps://dits.deloie.com/#TaxGuides. These countries are coded as

100 years.

12 Korea only allows 50 percent of losses to be carried back one year. This is coded as 0.5.
https://dits.deloitte.com/#TaxGuideshttps://dits.deloitte.com/#TaxGuides


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12 Additionally, the cost of special provisions is often offset by shifting the burden ontoother taxpayers in the form of higher tax rates.

In addition, the possibility of receiving incentives invites efforts to secure these tax

preferences,13such as lobbying, which creates additional deadweight loss as firms focus

resources on influencing the tax code in lieu of producing products. For instance, thedeadweight losses in the United States attributed to tax compliance and lobbying were

estimated to be between $215 and $987 billion in 2012. Tese expenditures for lobbying

along with compliance, have been shown to reduce economic growth by crowding out

potential economic activity.14

Te ICI considers whether countries provide incentives such as research and

development (R&D) credits and patent box provisions that apply lower tax rates on

income earned from patented technologies or procedures housed within the country.

Countries which provide such incentives are scored lower than those that do not.

Research and Development

In the absence of full expensing, an R&D tax credit provides a necessary offset for the

costs of business investment. Unfortunately, R&D tax credits are rarely neutralthey

usually define very specific activities that qualifyand are often complex in their

implementation. A countrys use of an R&D tax credit provides a useful insight into the

countrys willingness to provide other special tax provisions.

As with other incentives, R&D credits distort investment decisions and lead to the

inefficient allocation of resources. Additionally, desire to secure R&D incentivesencourages lobbying activities that consume resources and detract from investment and

production. In Italy, for instance, firms can engage in a negotiation process for incentives

such as easy term loans and tax credits, as long as the incentives have EU approval.15

Countries could better use the revenue spent on special tax incentives to provide a lower

business tax rate across the board or to improve the treatment of capital investment.

In the OECD, 28 countries provide incentives for research and development, including

the United States. Te type of incentive provided varies from country to country. For

example, Hungary provides for a double deduction of qualifying R&D costs, and

France provides cash payments to firms for R&D costs if the firm has not used those cost

to offset its income tax liability within three years. Te six countries that do not provide

incentives include Chile, Denmark, Estonia, Poland, Sweden, and Switzerland. Countries

that provide R&D incentives through the tax code receive a lower score on the ICI.16

13 Christopher J. Coyne & Loa Moberg, The Polical Economy of State-Provided Targeted Benets (George Mason

University, Mercatus Center Working Paper No. 14-13, May 2014),hp://mercatus.org/sites/default/les/

Coyne_TargetedBenets_v2.pdf .

14 Jason J. Fichtner & Jacob Feldman, The Hidden Costs of Tax Compliance(May 20, 2013), hp://mercatus.org/sites/default/

les/Fichtner_TaxCompliance_v3.pdf.

15 Deloie, Internaonal Tax Guides and Country Highlights, hps://dits.deloie.com/#TaxGuides.

16 Id.
http://mercatus.org/sites/default/files/Coyne_TargetedBenefits_v2.pdfhttp://mercatus.org/sites/default/files/Coyne_TargetedBenefits_v2.pdfhttp://mercatus.org/sites/default/files/Fichtner_TaxCompliance_v3.pdfhttp://mercatus.org/sites/default/files/Fichtner_TaxCompliance_v3.pdfhttp://mercatus.org/sites/default/files/Fichtner_TaxCompliance_v3.pdfhttps://dits.deloitte.com/#TaxGuideshttps://dits.deloitte.com/#TaxGuideshttp://mercatus.org/sites/default/files/Fichtner_TaxCompliance_v3.pdfhttp://mercatus.org/sites/default/files/Fichtner_TaxCompliance_v3.pdfhttp://mercatus.org/sites/default/files/Coyne_TargetedBenefits_v2.pdfhttp://mercatus.org/sites/default/files/Coyne_TargetedBenefits_v2.pdf


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13Patent BoxesAs globalization has increased, countries have searched for ways to prevent corporations

from reincorporating elsewhere. One solution has been the creation of patent boxes.

Patent boxes provide corporations a lower rate on income earned from intellectualproperty. Intellectual property is extremely mobile, so a country can use the lower tax

rate of a patent box to entice corporations to hold their intellectual property within its

borders. Tis strategy provides countries with revenue they might not otherwise receive if

those companies were to move their patents elsewhere.

Instead of providing patent boxes for intellectual property, countries should recognize

that all capital is mobile and lower their corporate tax rate across the board. Tis would

encourage investment of all kinds instead of merely incentivizing corporations to locate

their patents in a specific country.

Only eight OECD countriesBelgium, France, Ireland, Hungary, Luxembourg,

Netherlands, Spain, and the United Kingdomhave patent box legislation, with rates

and exemptions varying between countries.17Te United States has no patent box

incentives. Countries with patent box regimes score lower than those without patent

boxes.

Complexity

Corporate tax code complexity is quantified by measuring the compliance burden placed

on firms in order to pay their taxes. Tese burdens are measured by the number ofpayments made for the corporate income tax as well as the time needed to comply with

the tax (measured in hours of compliance time per year). ax code compliance consumes

resources that could otherwise be used for investment and business operations.

Countries that require higher numbers of tax payments and larger amounts of time for tax

compliance receive lower scores on the ICI. Te results are based on data from PwCs

Paying axes 2014 component of the Doing Business report from the World Bank. 18

Te nation with the highest number of tax payments levied on firms is Israel with 22. Te

Slovak Republic follows with 19, then Poland with 17. Sweden and Norway impose the

fewest number of payments with 3, while Mexico imposes the second fewest with 4. Te

average across the OECD is 8.8 payments, and the U.S. requires 11 payments.

Complying with corporate income taxes takes the most time in Mexico, at 170 hours,

followed by 155 hours in Japan and 110 hours in Israel. ax compliance takes the least

amount of time in Ireland, at 10 hours, followed by 15 hours in Switzerland and 19

17 Id. See alsoRobert D. Atkinson & Sco Andes,Patent Boxes: Innovaon in Tax Policy and Tax Policy for Innovaon (Oct. 2011),

hp://www.if.org/les/2011-patent-box-nal.pdf.

18 PricewaterhouseCoopers & The World Bank Group, Paying Taxes 2014: The global picture, hp://www.doingbusiness.org/~/

media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdf.
http://www.itif.org/files/2011-patent-box-final.pdfhttp://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdfhttp://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdfhttp://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdfhttp://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdfhttp://www.itif.org/files/2011-patent-box-final.pdf


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14 hours in Luxembourg. Te average across the OECD is 52 hours. In the United States,compliance time takes approximately 87 hours.

Consumption Taxes

Consumption taxes are levied on an individuals purchases of goods and services.Consumption taxes take various forms throughout the world. In the OECD, the value-

added tax is the most common consumption tax. Most consumption taxes avoid taxing

business inputs by either excluding them from the tax base or allowing for a credit. Te

exclusion of business inputs makes a consumption tax one of the most economically

efficient means of raising tax revenue.

However, many countries fail to define their tax base properly. Countries often exempt

too many goods and services from taxation, which requires them to levy high rates to

raise sufficient revenue. Some countries also fail to properly exempt business inputs. For

example, states in the United States often levy sales taxes on machinery and equipment.19

A countrys consumption tax score is broken down into three subcategories. able 3

displays the ranks and scores for the Consumption axes category.

Consumption Tax Rate

If levied at the same rate and properly structured, a value-added tax (VA) and a retail

sales tax will each raise the same amount of revenue. Ideally, either a VA or a sales tax

should be levied on all final consumption (although they are implemented in slightly

different ways). With a sufficiently broad consumption tax base, the rate at which the taxis levied does not need to be high. A VA or retail sales tax with a low rate and neutral

structure limits economic distortions while raising sufficient revenue.

However, many countries have consumption taxes that exempt goods and services that

should be taxed. Tis requires a country (or states, in the case of the United States) to

have a higher rate than would otherwise be necessary in order to raise sufficient revenue.

If not neutrally structured, high tax rates create economic distortions by discouraging the

purchase of highly taxed goods and services in favor of untaxed or self-provided goods

and services.

Countries with lower consumption tax rates score better than those with high tax rates.

Tis is because lower rates do less to discourage economic activity and allow for more

future consumption and investment.

19 Patrick Fleenor & Andrew Chamberlain, Tax Pyramiding: The Economic Consequences of Gross Receipts

Taxes, TAXFOUNDATIONSPECIALREPORTNO. 147 (Dec. 4, 2006), hp://taxfoundaon.org/arcle/

tax-pyramiding-economic-consequences-gross-receipts-taxes.
http://taxfoundation.org/article/tax-pyramiding-economic-consequences-gross-receipts-taxeshttp://taxfoundation.org/article/tax-pyramiding-economic-consequences-gross-receipts-taxeshttp://taxfoundation.org/article/tax-pyramiding-economic-consequences-gross-receipts-taxeshttp://taxfoundation.org/article/tax-pyramiding-economic-consequences-gross-receipts-taxeshttp://taxfoundation.org/article/tax-pyramiding-economic-consequences-gross-receipts-taxes


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15Table 3. Consumpon Taxes

CountryOverallRank

OverallScore

RateRank

RateScore

BaseRank

BaseScore

ComplexityRank

ComplexityScore

Australia 7 75.4 4 96.9 28 37.2 19 62.0

Austria 22 46.1 14 44.1 19 50.6 23 39.3

Belgium 29 29.4 19 36.7 21 49.6 29 8.9

Canada 10 63.4 8 75.4 22 44.0 19 62.0

Chile 30 28.7 12 51.6 11 63.5 34 1.7

Czech Republic 28 32.3 19 36.7 12 62.4 32 7.9

Denmark 14 59.2 30 13.7 3 88.1 14 74.6

Estonia 8 69.6 14 44.1 9 66.8 7 88.0

Finland 15 56.8 29 18.3 16 56.0 3 90.5

France 17 51.8 14 44.1 33 17.6 6 88.8

Germany 13 60.1 12 51.6 17 51.5 16 71.0

Greece 27 33.9 25 23.7 27 39.1 24 36.8

Hungary 33 19.1 34 7.1 18 51.1 26 11.1

Iceland 16 53.9 33 11.8 6 79.5 14 74.6

Ireland 24 42.6 25 23.7 31 18.8 8 85.3

Israel 9 67.5 10 59.1 2 90.2 22 41.9

Italy 20 48.8 23 29.9 29 28.7 9 83.3

Japan 2 91.5 2 99.4 10 63.6 12 80.2

Korea 3 89.9 4 96.9 14 58.8 4 89.7

Luxembourg 5 88.9 6 79.0 5 86.3 2 92.0

Mexico 21 48.0 9 73.0 8 68.9 29 8.9

Netherlands 11 61.4 19 36.7 13 59.1 11 81.3

New Zealand 6 83.1 6 79.0 1 100.0 21 49.9

Norway 23 45.2 30 13.7 15 56.7 17 69.7

Poland 34 17.7 25 23.7 30 21.5 29 8.9

Portugal 31 24.7 25 23.7 24 42.9 26 11.1

Slovak Republic 32 21.0 14 44.1 32 18.3 33 7.4

Slovenia 25 37.6 23 29.9 20 49.7 25 30.8

Spain 18 50.4 19 36.7 25 40.3 17 69.7

Sweden 12 60.8 30 13.7 4 87.7 13 79.1

Switzerland 1 100.0 2 99.4 7 77.4 1 100.0

Turkey 26 34.8 10 59.1 25 40.3 28 10.5United Kingdom 19 50.2 14 44.1 34 14.1 4 89.7

United States 4 89.2 1 100.0 23 43.9 10 82.3


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16 Te average consumption tax rate in the OECD is 19.1 percent. Hungary has the highesttax rate at 27 percent, while Japan has the lowest tax rate at 8 percent. Te United States

has the third lowest consumption tax rate with an average of 7.2 percent across all states

and localities.20

Consumption Tax Base

Ideally, either a VA or a sales tax should be levied on all final consumption. In other

words, government collections should be equal to the amount of consumption in the

economy times the rate of the sales tax or VA. However, many countries consumption

tax bases are far from this ideal. Tey either exempt too many goods and services,

requiring a higher rate than would otherwise be necessary, or apply the tax to business

inputs, increasing the cost of capital.

Consumption Tax Base as a Percent of Total Consumption

A countrys VA or sales tax base score is measured as a ratio of the revenue collected by

the VA or sales tax compared to the potential tax revenue under a VA or sales tax that

is levied on all final goods and services.21

For example, if final consumption is $100 and a country levies a 10 percent VA on all

goods, a pure base would raise $10. Revenue collection below $10 reflects either a high

number of exemptions built in to the tax code or low levels of compliance (or both).22

Te base is measured as a ratio of the pure base collections to the actual collections.

Countries with tax base ratios near 1, signifying a pure tax base, score higher.

Under this measure, no country has a perfect VA or sales tax base. New Zealand has the

broadest base with a ratio of 0.99, and Mexico has the worst with a ratio of 0.31.23Te

OECD average tax base ratio is 0.54. Te United States tax base ratio of 0.38 is below

the OECD average due mainly to states exempting many services that would be taxable

under a pure sales tax.

Deduction Limitations

When a business is calculating the VA it owes, it is able to credit the VA it previously

paid on an input. For example, a woodworking business may purchase lumber from

a mill for $110. $100 for the price plus $10 for the VA. Te woodworking business

20 Sco Drenkard, State and Local Sales Tax Rates in 2014, TAXFOUNDATIONFISCALFACTNO. 420 (Mar. 18, 2014), hp://

taxfoundaon.org/arcle/state-and-local-sales-tax-rates-2014.

21 Organizaon for Economic Cooperaon and Development, Consumpon Tax Trends 2012 (Nov. 13, 2012), hp://www.oecd-

ilibrary.org/taxaon/consumpon-tax-trends-2012_c-2012-en. This paper does not provide the measure for the United

States. The U.S. measure was calculated by the author.

22 It is also possible that the number is biased by VAT/sales tax evasion. If this is caused by a very high rate, it is sll

appropriate that a lower base score should penalize a country.


ilibrary.org/taxaon/consumpon-tax-trends-2012_c-2012-en.
http://taxfoundation.org/article/state-and-local-sales-tax-rates-2014http://taxfoundation.org/article/state-and-local-sales-tax-rates-2014http://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2012_ctt-2012-enhttp://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2012_ctt-2012-enhttp://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2012_ctt-2012-enhttp://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2012_ctt-2012-enhttp://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2012_ctt-2012-enhttp://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2012_ctt-2012-enhttp://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2012_ctt-2012-enhttp://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2012_ctt-2012-enhttp://taxfoundation.org/article/state-and-local-sales-tax-rates-2014http://taxfoundation.org/article/state-and-local-sales-tax-rates-2014


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17then makes a chair and sells it for $132. It charges $120 plus $12 for the VA. Before it

submits the VA payment to the government, it deducts the $10 in VA it paid on the

lumber. Tus it only pays $2 in VA. Between the mill and the woodworking business,

the $12 VA on the $120 value of the chair is paid. As long as each business is able to

deduct the VA paid on its inputs, the tax base will remain neutral.

However, some countries restrict deductions for VA paid on certain goods andservices purchased by businesses. Tese restrictions are meant to prevent businesses

from sheltering consumption by classifying it as the cost of business inputs. Te most

common examples are restaurant meals or cars. While these restrictions prevent some

hidden consumption, purchases of restricted goods are often truly business inputs. Tese

restrictions cause tax pyramiding, which creates uneven tax burdens across industries,

distorts companies structures, and harms economic performance.24

Countries score higher if they do not restrict the ability for a business to deduct VA or

sales taxes paid.

Deduction limitations are found in 25 countries. Te six countries that allow businesses

to deduct all VA costs are the Czech Republic, Denmark, Iceland, Israel, Mexico, and

Switzerland.

Although the United States does not have a VA, its sales tax suffers from an issue similar

to that caused by deduction limitations. A few U.S. states apply retail sales taxes to

business inputs,25which also creates tax pyramiding.

The VAT Threshold

Most OECD countries set thresholds for their VAs. Tis means that a businesss sales of

taxable items must reach a certain value before they are required to register and pay the

VA on its products. Although it may be the case that exempting very small businesses

from the VA saves time and money in compliance, unnecessarily large VA thresholds

create a distortion by favoring smaller businesses over larger ones.26

Countries receive better scores for lower VA thresholds. Te United Kingdom receives

the worst VA threshold score with a threshold of $110,744. Four countries receive the

best scores for having no general VA/sales tax threshold (Chile, Mexico, Spain, and

urkey). Te average threshold across the OECD is approximately $34,000.

24 Patrick Fleenor & Andrew Chamberlain, Tax Pyramiding: The Economic Consequences of Gross Receipts

Taxes, TAXFOUNDATIONSPECIALREPORTNO. 147 (Dec. 4, 2006), hp://taxfoundaon.org/arcle/

tax-pyramiding-economic-consequences-gross-receipts-taxes.

25 This is also the case for some Canadian provinces. See Duanjie Chen & Jack Mintz, 2013 Annual Global Tax Compeveness

Ranking: Corporate Tax Policy at a Crossroads (Nov. 2013), hp://www.policyschool.ucalgary.ca/sites/default/les/research/

mintz-2013-globtax.pdf.


ilibrary.org/taxaon/consumpon-tax-trends-2012_c-2012-en.
http://taxfoundation.org/article/tax-pyramiding-economic-consequences-gross-receipts-taxeshttp://taxfoundation.org/article/tax-pyramiding-economic-consequences-gross-receipts-taxeshttp://taxfoundation.org/article/tax-pyramiding-economic-consequences-gross-receipts-taxeshttp://www.policyschool.ucalgary.ca/sites/default/files/research/mintz-2013-globtax.pdfhttp://www.policyschool.ucalgary.ca/sites/default/files/research/mintz-2013-globtax.pdfhttp://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2012_ctt-2012-enhttp://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2012_ctt-2012-enhttp://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2012_ctt-2012-enhttp://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2012_ctt-2012-enhttp://www.policyschool.ucalgary.ca/sites/default/files/research/mintz-2013-globtax.pdfhttp://www.policyschool.ucalgary.ca/sites/default/files/research/mintz-2013-globtax.pdfhttp://taxfoundation.org/article/tax-pyramiding-economic-consequences-gross-receipts-taxeshttp://taxfoundation.org/article/tax-pyramiding-economic-consequences-gross-receipts-taxes


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18 ComplexityAlthough consumption taxes are generally more neutral than other taxes, they can

be complex in their implementation. Complex VAs and sales taxes create significant

compliance costs for businesses that need to remit payment to the government. Tis adds

to the total cost of paying taxes by reallocating resources from productive activities tocomplying with tax laws. Te complexity of a countrys consumption tax is measured by

the number of hours a business uses to comply with the tax, as measured by PwCs Paying

Taxes 2014component of the Doing Businessreport from the World Bank.27

Countries receive higher scores if compliance with their consumption taxes takes fewer

hours. Chile receives the worst score with a 124 hour compliance time. Switzerland

receives the best score by requiring only 8 hours a year to comply with its consumption

tax. Te United State has a relatively less complex consumption tax that only takes 33

hours to comply with. Te average number of compliance hours across the OECD is 56.4

hours.

Individual TaxesIndividual taxes are one of the most prevalent means of raising taxes to fund government

Individual income taxes are levied on an individuals income (wages and, often, capital

gains and dividends) in order to fund general government operations. Tese taxes are

typically progressive, meaning that the rate at which an individuals income is taxed

increases as the individual earns more income.

In addition, countries have payroll taxes. Tese typically flat-rate taxes are levied on wageincome in addition to a countrys general individual income tax. However, revenue from

these taxes is typically allocated specifically toward social insurance programs such as

unemployment insurance, government pension programs, and health insurance.28

Individual taxes have the benefit of being one of the more transparent taxes. axpayers

are made aware of their total amount of taxes paid at some point in the process, unlike

consumption taxes, which are collected and remitted by a business.

However, most individual taxes have the effect of discouraging work due to a highly

progressive structure and discouraging saving and investment by being applied to capital

gains and dividend income, which causes double taxation of corporate income.29

A countrys score for their individual income tax is determined by three subcategories:

Te rate and progressivity of wage taxation, the extent to which the income tax double



28 Kyle Pomerleau,A Comparison of the Tax Burden on Labor in the OECD, TAXFOUNDATIONFISCALFACTNO. 434 (June 19, 2014),

hp://taxfoundaon.org/arcle/comparison-tax-burden-labor-oecd.

29 Kyle Pomerleau, High Burden of Capital Gains Tax Rates, TAXFOUNDATIONFISCALFACTNO. 414 (Feb. 11, 2014), hp://

taxfoundaon.org/arcle/high-burden-state-and-federal-capital-gains-tax-rates.
http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdfhttp://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdfhttp://taxfoundation.org/article/comparison-tax-burden-labor-oecdhttp://taxfoundation.org/article/comparison-tax-burden-labor-oecdhttp://taxfoundation.org/article/high-burden-state-and-federal-capital-gains-tax-rateshttp://taxfoundation.org/article/high-burden-state-and-federal-capital-gains-tax-rateshttp://taxfoundation.org/article/high-burden-state-and-federal-capital-gains-tax-rateshttp://taxfoundation.org/article/high-burden-state-and-federal-capital-gains-tax-rateshttp://taxfoundation.org/article/comparison-tax-burden-labor-oecdhttp://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdfhttp://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdf


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19Table 4. Individual Taxes

CountryOverallRank

OverallScore

CapitalGains/

DividendsRank

CapitalGains/

DividendsScore

Income TaxRank

Income TaxScore

ComplexityRank

ComplexityScore

Australia 8 76.5 12 67.5 11 71.3 9 80.7

Austria 22 52.1 23 34.4 23 46.1 17 71.5

Belgium 9 74.9 6 87.2 28 38.4 7 84.2

Canada 24 47.0 27 26.7 29 34.3 12 79.2

Chile 19 56.7 22 39.7 10 73.2 25 49.9

Czech Republic 12 70.6 2 95.3 4 90.7 33 11.2

Denmark 28 39.8 34 7.9 22 46.6 11 79.5

Estonia 2 92.1 11 71.7 2 93.2 2 98.6

Finland 23 48.5 29 25.3 24 45.5 14 73.5

France 34 20.2 33 8.5 34 6.9 19 65.0

Germany 32 37.1 24 32.8 30 29.2 27 45.6

Greece 14 68.0 14 65.3 26 41.5 5 88.1

Hungary 17 63.5 15 56.1 6 89.1 29 33.5

Iceland 29 39.7 19 46.2 14 68.7 34 10.1

Ireland 20 54.1 32 8.6 9 74.7 4 90.6

Israel 27 43.3 16 56.1 16 62.5 32 13.2

Italy 33 29.2 19 46.2 31 20.1 31 19.9

Japan 25 46.7 21 45.8 20 51.8 28 36.1

Korea 10 74.1 10 76.2 12 69.3 19 65.0

Luxembourg 16 65.0 5 91.6 18 59.3 30 27.1

Mexico 3 88.5 9 86.7 5 90.1 15 72.9

Netherlands 6 79.8 6 87.2 19 57.2 10 80.0

New Zealand 1 100.0 1 100.0 1 100.0 13 75.3

Norway 13 69.2 25 30.1 13 69.0 1 100.0

Poland 15 68.0 18 48.7 3 91.8 24 50.4

Portugal 30 38.7 17 55.4 33 11.4 23 54.4

Slovak Republic 7 79.7 13 67.4 8 80.3 8 80.9

Slovenia 11 72.6 6 87.2 21 50.4 21 64.4

Spain 31 38.0 25 30.1 32 18.7 18 67.4

Sweden 21 52.2 31 24.1 27 38.7 3 92.2

Switzerland 5 82.8 4 91.6 7 87.5 26 48.0

Turkey 4 84.0 3 93.5 15 67.2 16 72.3

United Kingdom 18 58.9 28 25.3 17 61.3 6 87.2

United States 26 44.7 30 24.9 25 44.9 22 62.6


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20 taxes corporate income, and complexity. able 4 shows the ranks and scores for the entireIndividual axes category as well as the rank and score for each subcategory.

Taxes on Ordinary Income

Individual incomes taxes are a tax levied on the wage income of individuals. Countriesuse individual income taxes as a significant source of revenue. Tey are used to raise

revenue for both general government operations and for specific programs such as social

insurance and government-provided health insurance.

A countrys taxes on ordinary income are measured according to three variables: the top

rate at which ordinary income is taxed, the progressivity of the income tax system, and

the total tax burden on an average laborer.

Top Marginal Income Tax Rate

Most income tax systems have a progressive tax structure. Tis means that as an

individual earns more income, they move into new tax brackets with higher tax rates. Te

top marginal tax rate is the top tax rate on all income over a certain level. For example,

the United States has seven tax brackets with the seventh (top) bracket taxing each

additional dollar of income over $406,751 at a rate of 39.6 percent.

Individuals consider the marginal tax rate when deciding whether or not to work an

additional hour. High top marginal tax rates make additional work more expensive, which

lowers the relative cost of not working. Tis makes it more likely that an individual will

choose leisure over work. When high tax rates increase the cost of labor, this has the effecof decreasing hours worked, which decreases the amount of production in the economy.

Countries with high marginal tax rates receive a lower score on the ICI than countries

with low marginal tax rates. Sweden has the highest top combined marginal income tax

rate at nearly 57 percent.30Hungary has the lowest at 16 percent. When including state

and local taxes, the U.S. has a top marginal income tax rate of over 46 percent, which is 5

percentage points above the OECD average of 41 percent.

Income Level at Which Top Rate Applies/Progressivity

Te level at which the top marginal rate begins to apply is also important. If a country

has a top rate of 20 percent, but almost everyone pays that rate because it applies to any

income over $10,000, that country essentially has a flat income tax. A tax system that

has a top rate that applies to all income over $1,000,000 is highly progressive, because it

targets a small number of people that earn a high level of income.

30 Organizaon for Economic Cooperaon and Development, OECD Tax Database, Table I.7 - Top statutory personal income

tax rate and top marginal tax rates for employees, 2000-2013(updated Apr. 2014),hp://www.oecd.org/tax/tax-policy/tax-

database.htm. The total tax burden on individuals earning enough to be taxed at the top marginal rate may face an eecve

tax rate even higher due to social insurance taxes. These taxes are captured in the tax wedge on labor variable.
http://www.oecd.org/tax/tax-policy/tax-database.htmhttp://www.oecd.org/tax/tax-policy/tax-database.htmhttp://www.oecd.org/tax/tax-policy/tax-database.htmhttp://www.oecd.org/tax/tax-policy/tax-database.htm


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21Countries with top rates that apply at lower levels score better on the ICI. Te ICIbases its measure on the income level at which the top rate begins as compared to the

countrys average income.31Portugal has the highest level of income tax progressivity

(the top marginal income tax rate applies at 16.2 times the average Portuguese income),

whereas Hungary has the least progressive tax system with a 16 percent flat tax that

applies to the first dollar of Hungarian income. According to this measure, the U.S. hasthe 8th most progressive tax system in the OECD, with a top rate that applies at 8.5

percent of the average American income.

Tax Burden on Labor

Te total tax burden faced by a worker in a country or the total tax cost of labor for the

average worker in a country is called the tax wedge. Te tax wedge includes income taxes

and payroll taxes (both the employee-side and employer-side).

A high tax burden on labor increases the cost of labor relative to leisure. Tis discourageswork and increases the cost to hire labor. Fewer hours worked damages economic growth

and leads to lower levels of total output.

Te ICI gives countries with high tax wedges a low score due to the higher labor costs

associated with high tax burdens on workers. Workers in Belgium face the highest tax

burden at 55.8 percent, while workers in Chile face the lowest tax burden at 7 percent.

Te average across the OECD is 35.8 percent. Te U.S. has the 25th highest tax burden

in the OECD at 31.3 percent.

Capital Gains and Dividends TaxesIn addition to wage income, many countries individual income tax systems tax

investment income. Tey do this by levying taxes on income from capital gains and

dividends.

A capital gain occurs when an individual purchases an asset (usually corporate stock)

in one period and sells it in another for a profit. A dividend is a payment made to an

individual from after-tax corporate profits.

Capital gains and personal dividend taxes are a form of double taxation of corporate

profits that contributes to the tax burden on capital. When a corporation makes a profit,

it must pay the corporate income tax. It can then generally do one of two things. Te

corporation can retain the after-tax profits, which boost the value of the business and thus

its stock price. Stockholders then sell the stock and realize a capital gain, which requires

them to pay tax on that income. Alternatively, the corporation can distribute the after-tax

profits to shareholders in the form of dividends. Stockholders who receive dividends then

pay tax on that income.

31 Id.


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22 Dividends taxes and capital gains taxes create a bias against saving and investment, reducecapital formation, and slow economic growth.32

In the ICI, a country receives a higher score for lower capital gains and dividends taxes.

Capital Gains Tax Rate

Countries generally tax capital gains at a lower rate than ordinary income, provided that

specific requirements are met. For example, the United States taxes capital gains at a

reduced rate if the taxpayer holds the asset for at least one year before selling it (these are

called long-term capital gains). Te ICI gives countries with higher capital gains rates a

lower score than those with lower rates.

Some countries use additional provisions to help mitigate the double taxation of

income due to the capital gains tax. For instance, the United Kingdom provides annual

exemption of 10,900 and Canada excludes half of all capital gains income fromtaxation.33

Te average top marginal capital gains tax rate (given that requirements are met) is 16.6

percent across the OECD. Denmark has the highest top marginal capital gains tax rate

at 42 percent, while the U.S. has a top marginal capital gains tax rate of 27.9 percent.

Eleven countries exempt capital gains from taxation.

Inflation Indexing

Indexing capital gains for inflation ensures that investors are only taxed on the real returnon their investment, as opposed to any returns due simply to inflation.34Countries that

index capital gains taxes for inflation receive a higher score. Only four countries allow

taxpayers to adjust the basis of their taxable capital gains for inflation: Australia, Israel,

Mexico, and Portugal. Te U.S does not index capital gains taxes for inflation.

Dividend Tax Rates

Dividend taxes can adversely impact capital formation in a country. High dividend tax

rates increase the cost of capital, which deters investment and slows economic growth.

Countries rates are expressed as the total top marginal personal dividend tax rate after

any imputation or credit system.

Countries with lower overall dividend tax rates score higher on the ICI due to the

dividend tax rates effect on the cost of investment (i.e., the cost of capital) and the more

32 Kyle Pomerleau, The United States High Tax Burden on Personal Dividend Income, TAXFOUNDATIONFISCALFACTNO. 416 (Mar. 5,

2014), hp://taxfoundaon.org/arcle/united-states-high-tax-burden-personal-dividend-income.


34 Kyle Pomerleau & John Aldridge, Inaon Can Cause an Innite Eecve Tax Rate on Capital Gains, TAXFOUNDATIONFISCALFACT

NO. 406 (Dec. 17, 2013), hp://taxfoundaon.org/arcle/inaon-can-cause-innite-eecve-tax-rate-capital-gains.
http://taxfoundation.org/article/united-states-high-tax-burden-personal-dividend-incomehttps://dits.deloitte.com/#TaxGuideshttp://taxfoundation.org/article/inflation-can-cause-infinite-effective-tax-rate-capital-gainshttp://taxfoundation.org/article/inflation-can-cause-infinite-effective-tax-rate-capital-gainshttps://dits.deloitte.com/#TaxGuideshttp://taxfoundation.org/article/united-states-high-tax-burden-personal-dividend-income


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23neutral treatment between saving and consumption. Ireland has the highest dividend taxrate in the OECD at 48 percent.35Both Estonia and the Slovak Republic have a dividend

tax rate of 0 percent. Te United States has the 13th highest dividend tax rate at 28.3

percent.

Complexity

On top of the direct costs of paying income taxes, there are indirect costs associated

with complying with the tax code. Tese compliance costs are directly related to the

complexity of the tax code. Te more complex an individual income tax code, the more

time and money it requires for individuals and businesses to comply with it.

Complexity is measured as the number of hours it take a business to comply with wage

tax laws in each country. Tis measure is from the PwC and World Bank Doing Business

report.36Te Czech Republic receives the lowest score with a compliance time of 217

hours. Luxembourg receives the best score with a compliance time of 14 hours. TeUnited States income tax code requires 55 hour for compliance, compared to the OECD

average of 75.9 hours.

35 Organizaon for Economic Cooperaon and Development, OECD Tax Database, Table II.4 - Overall Statutory Tax Rates on

Dividend Income, 2000-2014 (updated May 2014), hp://www.oecd.org/tax/tax-policy/tax-database.htm.



Zrich, Switzerland.
http://www.oecd.org/tax/tax-policy/tax-database.htmhttp://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdfhttp://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdfhttp://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdfhttp://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdfhttp://www.oecd.org/tax/tax-policy/tax-database.htm


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24International Tax System

In an increasingly globalized economy, businesses often expand beyond the borders of

their home countries to reach customers around the world. As a result, countries need

to define rules determining how, or if, income earned in foreign countries is taxed.International tax rules deal with the systems and regulations that countries apply to those

business activities.

Te United States has what is called a worldwide tax system. Tis means that a U.S.

corporation operating in a foreign country must still pay taxes to the United States up to

the rate of 35 percent on foreign earned income.

Tere has been a growing trend of moving away from worldwide taxation toward a system

of territorial taxation, in which a countrys corporate tax is limited to profits earned

within its borders. In a territorial tax system, corporations only pay taxes to the countryin which they earn income. Since the 1990s, the number of OECD countries with

worldwide tax systems has fallen from 20 to 6.37

Te type of tax system is not the only consideration for the competiveness of a countrys

international tax system. Countries often subject their multinational corporations to

regulations that are arbitrary, expensive, and result from efforts to correct for underlying

issues that make their tax system uncompetitive.

able 5 displays the overall rank and score for the International Rules category as well as

the ranks and scores for the subcategories.

Territoriality

Under a territorial tax system, international businesses pay taxes to the countries in

which they earn their income. Tis means that territorial tax regimes do not tax the

income companies earn in foreign countries. A worldwide tax systemsuch as the

system employed by the United Statesrequires companies to pay tax on every dollar of

worldwide income no matter where it is earned.

Companies based in countries with worldwide tax systems are at a competitive

disadvantage, because they face potentially higher levels of taxation than their competitor

in countries with territorial tax systems. Additionally, the second tax on repatriated

corporate income increases complexity and discourages investment and production.38

Te territoriality of a tax system is measured by the degree to which a country exempts

foreign earned income through dividend and capital gain exemptions.

37 PricewaterhouseCoopers, Evoluon of Territorial Tax Systems in the OECD (Apr. 2, 2013), hp://www.techceocouncil.org/

clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdf.

38 William McBride, Twelve Steps toward a Simpler, Pro-Growth Tax Code, TAXFOUNDATIONFISCALFACTNO. 400 (Oct. 30, 2013),

hp://taxfoundaon.org/arcle/twelve-steps-toward-simpler-pro-growth-tax-code.
http://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttp://taxfoundation.org/article/twelve-steps-toward-simpler-pro-growth-tax-codehttp://taxfoundation.org/article/twelve-steps-toward-simpler-pro-growth-tax-codehttp://taxfoundation.org/article/twelve-steps-toward-simpler-pro-growth-tax-codehttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdf


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25Table 5. Internaonal Tax System

Country OverallRank

OverallScore

Div/CapGains

Exempon

Rank

Div/CapGains

Exempon

Score

WithholdingTaxes Rank

WithholdingTaxes Score

RegulaonsRank

RegulaonsScore

Australia 22 62.8 1 100.0 29 27.3 13 54.0

Austria 4 93.0 1 100.0 21 46.1 1 100.0

Belgium 8 84.5 16 97.0 17 53.8 3 82.9

Canada 27 42.5 22 47.7 22 45.3 25 26.4

Chile 33 18.3 29 6.2 34 7.4 13 54.0

Czech Republic 24 57.4 1 100.0 33 17.4 13 54.0

Denmark 20 66.4 1 100.0 26 35.0 13 54.0

Estonia 11 82.4 22 47.7 6 85.9 3 82.9

Finland 18 67.8 1 100.0 11 67.5 25 26.4

France 17 67.8 16 97.0 9 70.2 25 26.4Germany 10 82.5 16 97.0 8 78.3 13 54.0

Greece 28 40.5 22 47.7 25 39.9 25 26.4

Hungary 3 93.5 1 100.0 2 97.6 13 54.0

Iceland 16 70.0 1 100.0 24 42.2 9 55.4

Ireland 26 45.5 29 6.2 18 49.2 3 82.9

Israel 31 26.4 29 6.2 30 23.6 9 55.4

Italy 15 71.4 16 97.0 19 48.6 9 55.4

Japan 25 52.4 28 44.5 23 45.1 13 54.0

Korea 30 27.1 29 6.2 16 54.3 25 26.4

Luxembourg 2 97.4 1 100.0 5 86.5 3 82.9

Mexico 32 24.0 29 6.2 32 18.6 13 54.0

Netherlands 1 100.0 1 100.0 3 93.2 7 81.7

New Zealand 21 66.0 1 100.0 27 34.1 13 54.0

Norway 12 74.9 15 98.2 7 85.1 25 26.4

Poland 23 57.4 22 47.7 14 55.4 13 54.0

Portugal 29 37.3 22 47.7 28 31.5 25 26.4

Slovak Republic 6 86.1 22 47.7 10 69.3 1 100.0

Slovenia 13 73.8 16 97.0 13 56.4 13 54.0

Spain 14 72.1 1 100.0 20 47.7 9 55.4

Sweden 7 85.3 1 100.0 1 100.0 25 26.4

Switzerland 9 84.2 16 97.0 15 54.6 7 81.7

Turkey 19 67.4 1 100.0 12 66.5 25 26.4

United Kingdom 5 89.3 1 100.0 4 90.7 13 54.0

United States 34 18.2 29 6.2 31 22.5 25 26.4


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26 Dividends Received ExemptionWhen a foreign subsidiary of a parent company earns income, it pays income tax to the

country in which it does business. After paying the tax, the subsidiary can either reinvest

its profits into ongoing activities (by purchasing equipment or hiring more workers,

for example) or it can distribute its profits back to the parent company in the form ofdividends.

Under a worldwide tax system, the dividends received by a parent company are taxed

again by the parent companys home country, minus a tax credit for taxes already paid on

that income. Under a pure territorial system, those dividends are exempt from taxation in

the parents country.

Countries receive a score based on the level of dividend exemption they provide.

Countries with no dividend exemption (worldwide tax systems) receive the lowest score.

wenty OECD countries exempt all dividends received by parent companies from

taxation.39Eight countries allow 95 percent or 97 percent of dividends to be exempt from

taxation. Te United States, along with five other OECD countries, has a worldwide tax

system that does not exempt foreign dividends from taxation.

Branch or Subsidiary Capital Gains Exclusion

Another feature of an international tax system is its treatment of capital gains from

foreign investments. When a parent company invests in a foreign subsidiary (i.e.,

purchases shares in a foreign subsidiary), it can realize a capital gain on that investment ifit later divests the asset. A territorial tax system would exempt these gains from taxation

due to the fact that they are derived from overseas activity.

axing foreign-sourced capital gains income at domestic rates results in double taxation

and discourages saving and investment.

Countries that exempt foreign-sourced capital gains from taxation receive a higher score

on the ICI. Foreign-sourced capital gains are excluded from taxation by 21 OECD

countries. Te United States is among the 13 countries that do not exclude foreign-

sourced capital gains income from domestic taxation.40

39 Deloie, Internaonal Tax Guides and Country Highlights, hps://dits.deloie.com/#TaxGuides. See also

PricewaterhouseCoopers, Evoluon of Territorial Tax Systems in the OECD (Apr. 2, 2013),hp://www.techceocouncil.org/


40 Deloie, Internaonal Tax Guides and Country Highlights, hps://dits.deloie.com/#TaxGuides. See also

PricewaterhouseCoopers, Evoluon of Territorial Tax Systems in the OECD (Apr. 2, 2013),hp://www.techceocouncil.org/

https://dits.deloitte.com/#TaxGuideshttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttps://dits.deloitte.com/#TaxGuideshttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttps://dits.deloitte.com/#TaxGuideshttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttps://dits.deloitte.com/#TaxGuides


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27Withholding Taxes and Tax TreatiesWhen firms pay dividends, interest, and royalties to foreign investors or businesses,

governments often require those firms to withhold a certain portion to pay as a tax. For

example, the United States requires businesses to withhold a maximum 30 percent tax on

payments to foreign individuals.

Tese taxes make investment more costly both for investors who will receive a lower

return on dividends and for firms that must pay a higher amount in interest or royalty

payments to compensate for the cost of the withholding taxes. Tese taxes also reduce

funds available for investment and production and increase the cost of capital.

Withholding Tax Rates

Countries with higher withholding tax rates on dividends, interest, and royalties score

lower in the ICI. Dividends, interest, and royalties rarely face the same tax rate within anation. Te Czech Republic, Chile, and Switzerland levy the highest dividend and interest

withholding rates, requiring firms to withhold 35 percent of a dividend or interest

payment paid to foreign entities. Meanwhile, Estonia, Hungary, and Sweden do not levy

withholding taxes on dividends or interest payments.

For royalties, Mexico requires firms to retain the highest amount at 40 percent, followed

by the Czech Republic at 35 percent and France at 33.3 percent. Hungary, Luxembourg,

Netherlands, Norway, Sweden, and Switzerland do not require companies to retain any

amount of royalties for withholding tax purposes. Te United States levies a 30 percent

withholding tax on dividends, interest, and royalties and is one of ten countries to levythe same tax rate on all three classes.41

Treaty Network

Withholding taxes can be reduced through tax treaties. Tese treaties align many tax laws

between two countries, particularly with regard to withholding taxes, and attempt to

reduce double taxation. Countries with a greater number of countries in their tax treaty

network have more attractive tax regimes for foreign investment and receive a higher score

than countries with fewer treaties.

France has the broadest network of tax treaties (127 countries) and so receives the highest

score. Iceland receives the lowest score with a treaty network of only 30 countries. Te

United States has a treaty network of 67 countries, which is just below average. Across the

OECD, the average size of a tax treaty network is 71 countries.42


42 Id.


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28 International Tax RegulationsInternational tax regulations seek to prevent corporations from minimizing their tax

liability through aggressive tax planning. Tese regulations can take several forms, such as

rules for controlled foreign corporations (CFC) and thin capitalization rules.

International tax regulations often have the effect of making countries with uncompetitiv

tax structures even less competitive. Tese regulations place substantial burdens on

companies and require them to shift valuable resources away from production and toward

accountants and tax lawyers.

Controlled Foreign Corporation Rules

CFC rules are intended to prevent corporations from shifting their pre-tax profits from

a high tax country to a low tax country by using highly liquid forms of income. Tese

regulations define what a controlled foreign corporation is for tax purposes. If a foreignentity is deemed controlled, these regulations subject the foreign corporations passive

income (rent, royalties, interest) to the tax rate of the home country of the subsidiarys

parent corporation. In the U.S., these are called Subpart F rules. Tese rules subject all

passive income to taxation in the year in which it is earned.43

CFC rules vary widely between countries. Te definition of what constitutes control is

a somewhat arbitrary decision that often increases tax code complexity. For instance, the

U.S. considers a subsidiary with 50 percent U.S. ownership to be controlled and subject

to U.S. tax rates, while Australia considers a foreign company that is 50 percent owned by

five or fewer Australian residents, or 40 percent owned by one Australian resident, to becontrolled.

Countries with CFC regulations are given a lower score than countries without them.

CFC rules exist in 24 of the 34 OECD countries, including the United States.44

Countries without established CFC rules include Austria, Belgium, and Chile.

Restrictions on Eligible Countries

An ideal territorial system would only concern itself with the profits earned within

its borders. However, many counties have restrictions on their territorial systems that

determine when a businesss dividends received from overseas subsidiaries are exempt

from tax.

Some countries treat foreign corporate income differently depending on the country

in which the foreign income was earned. For example, many countries restrict their

territorial systems based on the OECD black list of countries. Te OECD deems these

43 U.S.-held corporaons are able to defer taxes on acve, or reinvested, income unl that income is repatriated to the United

States.



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29countries as having harmful tax practices, such as low or no taxes, a lack of transparencycharacterized by inadequate regulatory supervision or financial disclosure, and a lack of

information exchange with OECD governments.45For some countries, income earned in

restricted countries by domestic corporations is not exempt from domestic taxation.

Te eligibility rules create additional complexity for companies and are often establishedin an arbitrary manner. Portugal, for instance, limits exemptions for dividends and capital

gains earned abroad to those earned in countries that have an income tax equal to at

least 60 percent of its corporate tax rate. Italy, which normally allows a 95 percent tax

exemption for foreign sourced dividends paid to Italian shareholders, does not allow the

exemption if the income was earned in a subsidiary located in a blacklisted country.46

In the OECD, 15 of 34 countries place restrictions on whether they exempt foreign-

source income from domestic taxation based on the source of the income. Countries that

have these restrictions on their territorial tax system receive a lower score on the ICI.47

Thin Capitalization Rules

Tin capitalization rules limit the amount of interest a multinational corporation, or one

of its subsidiaries, can deduct for tax purposes. Low-tax countries create an incentive

for companies to equity finance their investments, while high-tax countries create an

incentive for companies to finance investments with debt and use interest deductions

to reduce their tax liabilities. Tin capitalization rules limit the amount of deductible

interest by capping the amount of debt a firm is allowed to bear based on a companys

ratio of debt to assets. Tese rules are one-size-fits-all, so they limit the financing options

of companies, even those companies that use debt finance for non-tax reasons.

Tin capitalization rules vary widely between countries, and there is much discretion

available to governments in enforcing these laws.48Tin capitalization rules have been

shown to reduce the value of firms and distort firm decisions about how to invest in

capital.49

Due to their complexity and their distortion of investment decisions, the ICI ranks

countries with thin capitalization rules lower than countries without them. Tin

capitalization rules are found in 24 of the 34 countries measured in the ICI. For

instance, Denmark limits interest deductions if a firms debt-to-equity ratio reaches 4 to

1, while Japan limits deductions at a 3 to 1 ratio.50Te United States restricts the ability

45 Organizaon for Economic Cooperaon and Development, Towards Global Tax Co-operaon (2000), hp://www.oecd.org/

tax/harmful/2090192.pdf.


47 PricewaterhouseCoopers, Evoluon of Territorial Tax Systems in the OECD (Apr. 2, 2013), hp://www.techceocouncil.org/


48 Jennifer Blouin, Harry Huizinga, Luc Laeven, & Gatan Nicodme, Thin Capitalizaon Rules and Mulnaonal Firm Capital

Structure (Internaonal Monetary Fund, Working Paper WP/14/12, Jan. 2014),hps://www.imf.org/external/pubs//

wp/2014/wp1412.pdf.

49 Id. This paper nds a 10 percent rise results in a 2 percent rise in debt-to-assets rao.

50 Japan has a complex clause that sets the limit at 3 to 1 unless a rm can point to comparable Japanese rms with higher

debt-to-equity raos, at which point Japan will allow the rm to reach the higher rao before liming deducons.
http://www.oecd.org/tax/harmful/2090192.pdfhttp://www.oecd.org/tax/harmful/2090192.pdfhttps://dits.deloitte.com/#TaxGuideshttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttps://www.imf.org/external/pubs/ft/wp/2014/wp1412.pdfhttps://www.imf.org/external/pubs/ft/wp/2014/wp1412.pdfhttps://www.imf.org/external/pubs/ft/wp/2014/wp1412.pdfhttps://www.imf.org/external/pubs/ft/wp/2014/wp1412.pdfhttps://www.imf.org/external/pubs/ft/wp/2014/wp1412.pdfhttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttp://www.techceocouncil.org/clientuploads/reports/Report%20on%20Territorial%20Tax%20Systems_20130402b.pdfhttps://dits.deloitte.com/#TaxGuideshttp://www.oecd.org/tax/harmful/2090192.pdfhttp://www.oecd.org/tax/harmful/2090192.pdf


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30 to claim an interest deduction on debt owed to foreign entities with debt-to-equity ratiosof 1.5 to 1 and net interest expenses that surpass 50 percent of the firms adjusted taxable

income for the year.51Countries such as Iceland, Estonia, and the Slovak Republic have

no established rules for thin capitalization.

Property Taxes

Property taxes are government levies on the assets of an individual or business. Te

methods and intervals of collection vary widely between the types of property taxes.

Estate and inheritance taxes, for example, are due upon the death of an individual and

the passing of his or her estate to an heir. axes on real property, on the other hand, are

paid at set intervalsoften annuallyon the value of taxable property such as land and

houses.

Many property taxes are highly distortive and add significant complexity to the lifeof a taxpayer or business. Estate and inheritance taxes create heavy disincentives

against additional work and saving, which damages productivity and output. Financial

transaction taxes increase the cost of capital, which limits the flow of investment to its

most efficient allocation. axes on wealth limit the capital available in the economy,

which damages long-term economic growth and innovation.

Sound tax policy minimizes economic distortions. With the exception of taxes on land,

most property taxes maximize economic distortions and have long-term negative effects

on an economy and its productivity.

able 6 shows the ranks and scores for the Property axes category and each of its

subcategories.

Real Property Taxes

Real property taxes are levied on a recurrent basis on taxable property, such as real estate

or business capital. For example, in most states or municipalities in the United States,

businesses and individuals pay a property tax based on the value of their real property.

Structure of Property Taxes

Although taxes on real property are generally an efficient way to raise revenue, some

property taxes can become direct taxes on capital. Tis occurs when a tax applies to more

than just the value of the land itself, such as the buildings or structures on the land. Tis

increases the cost of capital, discourages the formation of capital (such as the building of

new structures), and can negatively impact business location decisions.



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31Table 6. Property Taxes

CountryOverallRank

OverallScore

RealProperty

Taxes Rank

RealProperty

Taxes Score

Wealth/Es

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